"Effect of 2.4%P Increase in Fixed Interest Rate Proportion through Anshim Conversion Loan"

The Bank of Korea "Cautions on Possible Increase in Volatility of Government Bond Yields"

Photo by Asia Economy DB

[Asia Economy Reporter Seo So-jeong] The preferential-type Safe Conversion Loan, which converts variable-rate mortgage loans to long-term fixed rates as low as 3.7%, is expected to increase the proportion of fixed-rate loans in banks by about 2.4 percentage points.

On the 27th, the Bank of Korea held a press workshop on the topic of 'Structural Causes of High Proportion of Variable-Rate Loans and the Effects of Safe Conversion Loans' and announced this.

Since the 15th, the banking sector has been handling Safe Conversion Loans worth 25 trillion won, which refinance variable-rate and quasi-fixed-rate mortgages held by low-income and vulnerable borrowers at banks and non-banks into long-term, fixed-rate, and installment repayment loans.

The Bank of Korea stated, "While the structure of household loans is improving due to the handling of Safe Conversion Loans, indirect effects such as a decline in banks' loan-to-deposit ratios and a reduction in risk-weighted assets will expand banks' lending capacity. However, considering demand slowdown in household loans, the impact on loan growth is expected to be limited."

Although concerns in the bond market are growing due to the Safe Conversion Loans, the Bank of Korea judged that the scale of this Safe Conversion Loan is not large, and the issuance of mortgage-backed securities (MBS) related to the Safe Conversion Loans is likely to take place next year, so there will be almost no supply burden this year. The Bank of Korea estimated that the expected supply scale of policy mortgages this year will slightly exceed the 2019?2021 average (38.3 trillion won) even if all Safe Conversion Loan supply is exhausted.

However, it was raised that preemptive portfolio adjustments considering banks' mandatory MBS purchases and reduced capacity to buy other bonds could pose supply and demand burdens in the government bond, financial bond, and public bond markets. In the past, after the issuance of Safe Conversion Loan MBS, banks' holdings of bonds decreased by 6.6 trillion won in government bonds, 4.6 trillion won in public bonds, and 3.3 trillion won in financial bonds in 2015, and government bonds decreased by 4.0 trillion won in 2019.

Also, if the Korea Housing Finance Corporation (KHFC) conducts hedging transactions such as selling government bond futures to prepare for rising market interest rates, volatility in government bond yields is likely to increase. In the past, before the issuance of Safe Conversion Loan MBS, government bond yields rose due to KHFC's hedging transactions.

Furthermore, the Bank of Korea analyzed that the structural causes of the high proportion of variable-rate household loans include ▲ insufficient long-term funding deposits by banks ▲ expansion of jeonse (key money deposit) and credit loan proportions ▲ and the highlighted merits of variable rates due to the widening gap between short- and long-term interest rates. According to the Bank of Korea, the proportion of variable-rate household loans in South Korea was 82.3% for new loans and 78.4% for outstanding balances as of last July, significantly exceeding the 2017?2021 averages of 66.2% and 68.5%, respectively.

Kim In-gu, Director of the Financial Market Department at the Bank of Korea, said, "The possibility of expanding banks' lending capacity through Safe Conversion Loans is expected to be limited," and added, "Attention should be paid to the effects of banks' preemptive portfolio adjustments due to mandatory MBS purchases and KHFC's hedging transactions using government bond futures."

This content was produced with the assistance of AI translation services.